What You Need to Know Before Exiting Mortgage Forbearance

Millions of people are struggling with their mortgage payments. It’s true that the total number of loans in forbearance did decrease in December to 5.48%, but that doesn’t mean that people are out of the woods yet. According to the MBA, there are 2.7 million people in active forbearance, who will soon reach their six-month mark and either apply for their one-time extension or resume their payments. 

Unfortunately, just because you run through your forbearance period doesn’t mean you’re financially ready to go back to paying your mortgage in full. Thankfully, you still have options. The FHA has provided a two-month extension of the eviction and eviction moratorium for single-family borrowers. Here’s what you need to know about mortgage forbearance during the pandemic. 

Forbearance under the CARES act

If you’re having a hard time paying your mortgage, the CARES act allowed homeowners to apply for a six-month forbearance period and an additional one-time six-month extension. That relief has been extended through February 28. To apply, you do not have to prove the pandemic has financially impacted you. Many private lenders are also offering forbearance, though terms may be different. 

Federally-backed mortgages include:

  • U.S. Department of Agriculture (USDA)
  • Department of Veteran Affairs (VA loans) 
  • Fannie Mae and Freddie Mac 

[ Read: What is Mortgage Forbearance?

Keep in mind that forbearance isn’t mortgage forgiveness. You will pay that money back in the end. Before you even enter forbearance, you should know the expectations and requirements of your servicer when the period ends. 

Common options for repayment after forbearance ends:

  • A lump-sum payment when you exit forbearance
  • A repayment plan that will spread the amount owed over a specified number of months Which will mean an increased monthly payment during that time
  • Your servicer offers the option of modifying your loan through a defined modification program
  • An extension of your loan term to account for the amount of time it will take to pay back the missed payments 

How does it impact your credit?

Missing your payments and being delinquent on your mortgage can be detrimental to your credit. A provision of the CARES act is that your forbearance period will not negatively impact your credit score. 

Ordinarily, your forbearance would be reported to creditors. Until the relief ends, your account will be reported the same from the start of your forbearance period until the end. So if you were current on your payments before, you’ll still be considered current. The same goes for delinquent accounts. That said, your forbearance is reported, so future lenders will see it.

[ Read: Why Have Credit Scores Increase During the Pandemic? ]

Mistakes do happen, even on credit reports. During your forbearance period, make sure you carefully read through your credit reports; that way you catch any errors. The same goes for your loan statements. Just because you are not actively paying doesn’t mean you should disregard your billing statements. 

In this article

    Forbearance isn’t always the solution to the problem

    Even with the help of forbearance, it doesn’t mean everyone is ready to resume payments. 54% of households say they are not confident they are able to restart their payments. Additional support is needed post forbearance. 

    According to the Urban Institute, 85% of people who are delinquent on their mortgage payments are working with services to mitigate the losses — while 15% are not working with the options available. Researchers suggest that a considerable portion of the people who are delinquent on their mortgage and not doing anything about it is because they might not know about the options available to them. Navigating the ins and outs of the forbearance process can be difficult.

    What to do if you exit forbearance but still need help

    Talk to your lender

    If you still need help past your forbearance period, talk to your lender. “Credit unions in particular, as nonprofit member-owned financial institutions, are more likely to work with their members to try to help them out,” says CUNA Senior Economist Jordan van Rijn.

    “This may including flexible installment plans, refinancing, or restructuring the loan. In most cases that we are aware of, the skipped payments are simply added to the end of the mortgage such that the borrower doesn’t have to pay the entire amount that was missed while he/she did not make payments,” van Rijn adds. 

    Consider refinancing 

    If you have a relatively strong credit score, you may consider refinancing your mortgage, which would earn you a lower monthly payment and a shorter loan term. That said, the closing costs for this option can be high –– often ranging from 2% to 5% of your loan. 

    [ Read: Mortgages in Forbearance Will be Eligible for Refinance

    Generally, it’s best to only refinance if you plan to stay in your home for at least five years and would save 0.5%, van Rijn advises. Given the upfront costs, this option is ruled out for many people during the pandemic. 

    “Housing prices have increased at a dramatic pace during the pandemic with the Case-Shiller National Home Price Index reaching record levels. Over the past year through October 2020, the index increased an incredible 8.4%, the fastest since 2014. This, in turn, has led to increased equity in people’s homes, allowing for more mortgage refinancing,” says van Rijn

    FAQs

    When my forbearance period ends, will I have to pay it all back at once?

    How you repay the back payments on your mortgage will be determined by your lender. Common methods include adjusted repayment schedules, a loan extension to account for that time, or a lump sum payment. 

    Will applying for forbearance hurt my credit score?

    Normally, your forbearance would be reported to creditors. However, in response to the pandemic, a provision of the CARES act states that your forbearance period will not negatively impact your credit score. 

    Will I pay more in interest if I get forbearance?

    No. Your interest rate will remain the same during your forbearance period, though it will still be occurring. If you do not pay by the time your forbearance ends, it will be added to your balance. 

    Can I apply for forbearance for my rental property?

    You can apply for forbearance for a rental property if the mortgage is federally-backed. Talk to your lender to find out the terms of repayment for your forbearance period. 

    Expert Cited

    Jordan van Rijn
    Jordan van Rijn

    Senior Economist , Credit Union National Association

    Jordan van Rijn is Senior Economist for the Credit Union National Association (CUNA) and Associate Lecturer at the University of Wisconsin-Madison’s Department of Agricultural and Applied Economics. He has 10 years of experience in international development, micro finance, and economic research in Latin America, Africa, Southeast Asia and the United States. Jordan conducts statistical and economic analysis to support CUNA’s advocacy efforts.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

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    Taylor Leamey

    Personal Finance Reporter

    Taylor Leamey is a personal finance reporter at The Simple Dollar who specializes in personal loans, student loans, mortgages, renters, and financial policy. Her reporting has also been featured at CreditCards.com, Interest.com, Reviews.com, MyMove.com, and elsewhere.

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    • Andrea Perez
      Andrea Perez
      Personal Finance Editor

      Andrea Perez is an editor at The Simple Dollar who leads our news and opinion coverage. She specializes in financial policy, banking, and investing.